ITV plc. (LON: ITV) - Good old value.
ITV plc. (LON: ITV) - A Value Proposition.
ITV plc is an integrated producer-broadcaster (IPB) that Creates-Produces-Distributes content globally.
ITV has two distinct business segments:
1) Media & Entertainment (previously – Broadcast).
2) ITV studios.
The broadcast business has recently been restructured into Media & Entertainment and has two divisions – 1) broadcast and 2) On-demand – to better reflect the changing business environment.
Revenues are advertiser-driven, subscription and external studio content creation driven.
Source: • ITV revenue by source 2020 | Statista
The top two broadcasters in the UK are the BBC with 31% market share and ITV with 22.2% market share.
Source: • UK: TV broadcasters market share 2020 | Statista
1) The Media & Entertainment division is home to the ITV family of channels. It delivers SVOD (Britbox UK, Britbox International which is available in the US, Canada & Australia), AVOD (ITV Hub & ITV Hub+), and Linear/ Free-to-Air commercial channels in the UK (ITV 2, ITV 3, ITV 4, ITVBe & CITV). Britbox UK and Britbox International are a Joint Venture (JV) with the BBC.
2) ITV Studios creates, produces, and distributes content across 12 countries and includes ITV Studios UK, ITV Studios US, and ITV Studios International (Netherlands, Germany, France, Italy, the Nordics, and Australia). ITV Studios produces largely unscripted content, followed by scripted content. The ITV Studios segment creates and produces programs and formats that include drama, entertainment, and factual entertainment for its own channels and other broadcasters, such as the BBC, Channel 4, Channel 5, Sky, and other streaming services. ITV Studios also licences finished programs and unscripted formats around the globe (For example – Love Island – Australia, Czech Republic, Slovakia, Finland, Germany, Netherlands, New Zealand, Nigeria, Norway, United States and Canada, etc.).
Source: • ITV studios revenue 2020 | Statista
The ITV studios and the Media and Entertainment divisions combine to create synergies by enforcing its business model which is to create – produce - distribute content worldwide. This vertically integrated content enables ITV to understand what customers want and can then create and produce shows which cater to specific segments of the population. This data enables ITV to offer the ability to advertisers to target the type of viewers/customers they specifically want to attract. To do this more efficiently, ITV's digital advertising platform- Planet V leverages this data to better guide advertisers to whom they want to target. This creates an important moat around the business. There are ongoing investments in data analytics and technology to leverage the Planet V platform to better serve advertisers and advertising agencies. As the world adjusts to the new normal, we expect productions of ITV studios to start to get back to pre-pandemic levels.
ITV has come out of the pandemic relatively intact; advertisement revenue has bounced back to pre-pandemic levels; production backlog is being cleared and is expected to return to normalcy by the start of the year 2022 - provided no deadlier variants mutate and spread in the western world (ITV’s main market).
The company expects to reinstate dividends for 2021 signalling that the management expects profitability to return to pre-pandemic levels soon and grow from there.
ITV is undergoing a digital transformation which will increase CAPEX (£75 million) but will lead to operational savings and transform the mediums (platform) of delivery to customers (users).
Source: • ITV Group external revenues 2020 | Statista
There has been a seismic shift in streaming platforms over the last decade. By recently engaging in the strategy to be a digitally-led media, ITV certainly is late, but it hopes to capture a niche market internationally that engages with subscribers who demand British content.
With a shift towards the On-Demand model of viewing content, ITV hopes to increase its subscriber base around the world with its offering of Britbox (UK & International) which is a joint venture with the BBC. ITV would continue its advertising revenue-driven model in tandem with a subscription revenue-driven model, which seeks to leverage its over 46,000 hours of content.
With this, ITV has planted a firm leg in the present and is taking a step into the future.
The ITV cable channels as well as the ITV Hub and ITV Plus will remain as a free-to-air advertisement-funded revenue stream for the foreseeable future.
ITV continues with the SVOD (subscription video on demand) and AVOD (advertisement video on demand) models because linear viewing is still popular with older audiences and streaming is popular with younger audiences.
We expect, with the passage of time that streaming services will command a much greater share of viewing than cable TV as more digitally integrated TVs come to market, and the user interface becomes much simpler to operate for older audiences and the “digitally challenged”.
DCF Valuation Model Summary
Assumptions of Inputs
1) Revenues: Revenues are expected to rebound to pre-pandemic levels and grow due to expansion in other markets during the upcoming years. I expect an increase in studio revenues in the future as global formats of unscripted shows are syndicated to various other countries as they have in the past (Example - The Voice - 70 countries, Love Island - 21 countries, Let Love Rule - 6 countries, The Chase - 17 countries, etc. and more new formats in the pipeline). In the past, studio revenues have grown from £597 million in 2007 to £1822 million in 2019 – growing at a compounded rate of 11.80%. Since ITV is mainly concentrating on its AVOD service With the introduction of Planet V (digital advertising purchase platform), we expect higher revenues for the same number of views due to precision advertising ability for which advertisers and advertising agencies would be willing to pay a premium.
2) Operating Margin: ITV is and will be producing a larger number of scripted shows/programmes than before as it tries to draw in diverse groups of viewers for its Britbox UK and Britbox International streaming platforms to compete with other streaming services. Scripted shows have lower margins than unscripted shows because the production costs, talent acquisition costs and Intellectual Property rights are much more expensive than unscripted shows on a per-view basis. This shift will lead to lower operating margins as the percentage of scripted shows increase relative to unscripted shows.
3) Tax Rate: U.K. corporate tax rates are confirmed to increase from 19% to 25% with effect from 1st April 2023.
4) Reinvestment: Reinvestment is based on the Sales/Capital ratio which shows the expected amount of reinvestment required for a given increase in revenues. As ITV moves to be a digitally-led company and expands into international markets, I expect increasing amounts of investment to enable ITV to transform.
5) Return on Capital: due to its creation – production – distribution business model, I believe this gives ITV a substantial moat with better data and vertical integration in its business to have a higher return on capital than its competitors. As other services expand into its territory, I believe margins may start to decline as more and more competitors arrive. The lack of barriers to entry (raising capital) in the streaming space may be a potential problem that may affect its return on capital over the long term.
6) Cost of Capital: I do not expect much change in the cost of capital as ITV is a mature firm with a relatively stable capital structure and do not expect deterioration in the quality of its balance sheet which would cause an increase in the cost of borrowing and would hence make equity more expensive than before.
Conclusion of Valuation
ITV is a mature company in a rapidly changing business. I believe, over time, ITV Studios’ revenue will grow to keep up with the increasing demand of its media and entertainment business along with the demand from its streaming competitors. ITV has a strong moat from its global unscripted business, and it is expected to continue in the future. I believe the international SVOD and AVOD business of ITV is limited as it is a niche product (British-based content) and may not appeal as much to a global audience as the diverse offerings of its streaming competitors. A slow decline in linear viewers is expected as people shift to connected television sets with increased offerings of streaming aggregators.
I believe, even with a slower growth rate than previously achieved by ITV, and increased competition from global streaming services, ITV is a good old value buy at £1.08 and is extremely undervalued as its estimated intrinsic value is £1.88. Along with expected price appreciation, the management of ITV expects dividends to be set at a floor price of £0.05 in 2022 and grow from there year on – giving a dividend yield of 4.62% (based on £1.08). In this environment of low-interest rates, this is an appealing investment.